“New” Oil Regs Need More Work and Review

JUNEAU – Today, Alaska Democratic Legislators warned of significant risks, impossible expectations, and the potential for industry to game the system in their official comment letter to the Alaska Department of Revenue on its proposed regulations for Senate Bill 21, the governor’s oil wealth giveaway.

“The underlying bill [SB21] is lazy law. It punts the near impossible task of separating new oil from old fields to the regulators with no clear direction,” said House Democratic Leader Beth Kerttula, a former state attorney who practiced oil and gas law. “The Department is really trying, but it’s a fool’s errand.”

During meetings with the Department of Revenue on the proposed regulations, oil industry representatives from ConocoPhillips and the Alaska Oil and Gas Association complained of confusing regulations on “new” oil and argued for regulations with broader definitions of what oil would be considered “new” and therefore eligible for extra tax breaks.

“The problem of defining ‘new’ oil was pointed out frequently while SB21 was under debate, so it’s no surprise to me that the governor’s staff can’t make it work now,” said Senator Hollis French (D-Anchorage).

While the legislators’ comments address a number of concerns with the proposed regulations, the most problematic area is how to define what is “new” oil from acreage added to legacy fields such as Prudhoe Bay. Allowing oil already under development to get added incentives designed for “new” oil could wrongly cost the state hundreds of millions of dollars in coming years.

"Governor Parnell sold SB 21 to Alaskans as a way to simplify our oil taxes. But there's nothing simple about this ill-conceived law, as industry reaction to the draft regs shows,” said Senator Bill Wielechowski (D-Anchorage). “The law is broken and needs to go."

In the section of their comment letter about new oil from legacy fields, the Democratic legislators state, “The stakes are huge in this part of the regulations, and Alaska cannot afford overbroad definitions that grant incentives for what the Legislature did not intend to incentivize… The bottom line is that under SB21 and its legislative intent, the regulations must be kept very narrowly drafted considering what will be “new” oil in old, legacy fields.”

The conclusion of the letter begins, “The vagueness of the new oil provisions in SB21 create a quandary for the state: it creates the potential that regulators could interpret the definition too loosely, drastically harming future revenue, or it opens the potential for drawn-out litigation should the industry disagree with how the department defines what is “new” oil. This and several other provisions of SB21 are recipes for disaster.”

Due to the “uncertain direction from the statute, significant technological challenges, and fundamental disparity between the positions of the industry, departments and the Legislature,” the legislators recommend the Department of Revenue defer all of the regulations related to the Gross Value Reduction (GVR) and “new oil” pending more public review and better assessments of the geological and technological conditions to make sure the regulations are fair, coherent, and workable.

“If this giveaway didn’t try to reward old oil as new, we wouldn’t have this problem,” said French.